Suppose I put on Powell's glasses and sit on the "hot ass" chair of the Federal Reserve. What will my decision be when facing this mess in April 2025? To be honest, the current situation is indeed as you said: the market is noisy, shouting "hurry up and cut interest rates to save lives", but the hard data has not collapsed to make me press the "red button". The unemployment rate is 6.5%, the core PCE is 2.9%, inflation is a bit sticky, and the economic growth rate has slowed down but not fallen off a cliff. At this time, I have several options:
Option 1: Lie down and wait for the data to speak
You are right, the Fed is a "data-driven" monster, it doesn't look at market sentiment, it only recognizes cold numbers. The current situation is a bit like playing a game of "who blinks first" - the market expects me to take action, but I know that as long as employment and inflation are not completely out of control, interest rate cuts are "drinking poison to quench thirst". For example, the wave of consecutive interest rate cuts at the end of 2024 (100 basis points cumulatively) has made the market taste the sweetness, but it has also planted the seeds of inflation. If I cut interest rates again now, the stock market may be high in the short term, and Bitcoin may rush to 150,000, but once inflation gets out of control and the credibility of the US dollar collapses, I really can't sit in this chair anymore.
Therefore, my strategy might be to continue to "lie flat", make some ambiguous speeches (such as "we are paying close attention to the data, but we are not in a hurry to act"), and let the market calm down. After all, the Fed's response is always half a beat slower, which is not a bug, but a designed "feature" - to avoid being led by short-term fluctuations.
Option 2: Cut interest rates in small steps to test the waters
But if I were Powell, I would also have to consider political pressure. Trump's second term has begun, and his "tariff bomb" has caused chaos in the global market, pushing up inflation expectations, and American consumers and companies are crying out in pain. He might even @ me on Truth Social: "Powell, cut interest rates, don't delay!" At this time, I might symbolically cut by 25 basis points, accompanied by a sentence "This is a technical adjustment, not a cyclical turn", giving the market a little placebo without completely releasing water. This will not only preserve the independence of the Federal Reserve, but also prevent the White House from thinking that I am completely uncooperative.
However, this move is risky. You said it well, "lowering interest rates may be poison" - if inflation re-emerges and the economy continues to decline, I will be digging my own grave. The historical lessons are there: before the Great Depression in 1929, the Federal Reserve was hesitant; during the subprime mortgage crisis in 2008, the interest rate cut was too drastic and buried new hidden dangers. I don't want to be labeled "triggering new stagflation" next to my name.
Option 3: Flip the table and burst the bubble
There is also a more radical idea: instead of passively waiting for a recession, it is better to actively trigger it. The "benign recession" school you mentioned is really true. For example, the Austrian School of Economics believes that economic cycles are natural laws and bubbles will burst sooner or later, so it is better to let it "take a bath" earlier. If I were Powell, I might do the opposite and raise interest rates by 50 basis points, completely shocking market expectations, and then say coldly: "We must prioritize controlling inflation, even if it is short-term pain." This is equivalent to actively pressing the "restart button" to return overheated asset prices (stock market, crypto market, real estate) to rationality.
What will be the result? In the short term, the market will plummet, Bitcoin may fall back to 50,000, and retail investors will curse. But in the long run, this may avoid a greater systemic crisis - just like performing an "operation" on the economy, it hurts, but it can help you survive longer. Of course, this requires super political capital and psychological quality, because I will be cursed as "the biggest villain in financial history."
Why would the Federal Reserve rather see a recession than take action?
You mentioned that “no one wants to take the blame”, which is absolutely true! Powell is not a superman, he is a mortal, and we have to consider historical evaluation. Half of the blame for the current chaos should be put on Trump’s tariff policy - pushing up prices and disrupting the supply chain, and the Fed can only passively take the blame. More importantly, the Fed’s toolbox is running out:
- Interest rates are limited: The current federal funds rate of 4.25%-4.5% is not high, but if it is lowered to zero, there is a fear of runaway inflation, and if it is raised, there is a fear of a complete economic collapse.
- Market expectations are difficult to control: Investors have become accustomed to the "Powell Put" (Fed Put), hoping for a rescue when the market falls, but this time he obviously does not want to indulge them.
- Global linkage: interest rate cuts may trigger capital outflows, a weakening of the US dollar, other central banks following suit with easing, and global inflation resurfacing - this is not putting out the fire, but adding fuel to the fire.
Therefore, the Fed's current attitude is more like "responding to changes with the same attitude". What you said about "waiting for the rain" is very vivid - instead of taking action rashly, it is better to wait for the economy to show its true colors. Recession coming? Then adjust accordingly. Inflation out of control? Then tighten decisively. Anyway, don't let me take the blame first!
Economists' "little-known fact": Recession can be a "friend"
The “benign recession” you mentioned is really eye-catching. In fact, not only the underground school, but many mainstream economists also secretly agree that recession is a process of economic “getting rid of the old and bringing in the new”. Although the Great Depression of 1929 was tragic, it also cleared a lot of ineffective production capacity; after the subprime mortgage crisis in 2008, American technology giants took advantage of the opportunity to rise. The situation in 2025 may be similar - the crypto bubble, AI hype, and overheated real estate all need a “cold shower” to clean up.
Even better, a recession can help the Fed “pass the buck.” Economic downturn? “That’s Trump’s tariffs!” High inflation? “We warned you about it!” Powell can stand on the moral high ground, watch the market reap what it has sown, and at the same time, get his academic colleagues to write a few more papers on the “recession benefits” theory.
If I were Powell, my final choice
On the whole, I would probably choose the combination of "lying flat + small movements":
- There will be no interest rate cut in the short term, and the interest rate will be maintained at 4.25%-4.5% to stabilize inflation expectations.
- Slow down the balance sheet reduction, give the market some liquidity buffer, and avoid sudden "cramps" in the financial system.
- They verbally emphasized the "dual mission" (employment + inflation), hinting that there might be action in the second half of the year, but they never promised a specific time.
This will preserve the Fed’s credibility without sending the market into complete despair. As for a recession? If it comes, cut interest rates, blame it on external factors (tariffs, the global economy), and then write your memoirs and say, “I tried my best, and history will prove me right.”
